Tight liquidity pushing interest rate up

Money market shows fresh signs of unrest

Kazi Zahidul Hasan :Interest rates against lending and deposits have started increasing again in view of the tight liquidity situation in banks sending a fresh wave of stress in the money market.Insiders said the situation resulted from aggressive banking, slower deposit growth and Bangladesh Bank's move to bring down advances against deposits. At least 30 banks have already increased rates of interest on their deposits to cope up with the situation. The average interest rate against designated deposits is edging up from 0.50 per to 1.0 per cent.They said state-owned commercial banks moved forward in this competition among the banks at the beginning of the New Year. Â "We're now offering 5.50 to 6.0 per cent interest on term deposits, while their rates were 3.50 to 4.0 per cent interest last year. We will even offer a higher rate to lure more depositors," a senior executive of a state-owned bank told The New Nation yesterday, asking not to be named. He said private banks are even offering higher rates than public banks ranging between 6.50 per cent and 7.0 per cent.Â Â Public banks held 75 per cent of the total deposit in banking sector while private banks 25 per cent. Â "We have increased rates following BB's move to ease advance to deposit (AD) ratio. If the AD ratio comes down, the banking sector would require Tk 25,000 crore additional liquidity. Banks have prepared for the situation and moved to draw more deposits by raising rates," Moshiur Rahman Chowdhury, Managing Director of AB Bank told The New Nation.As a result, it also pushed up lending rates.Â Â "Rates on short-term instruments have already gone up and it may climb further amid a tight liquidity situation in banks resulting from high credit growth against slow deposit growth," Senior banker Nurul Amin told The New Nation yesterday. Â "The situation will not improve unless retail deposits is pick up drastically," he opined. BB reported an overall credit growth of 18.40 per cent in October last year, while deposits have only grown by 10.57 per cent. The private sector credit was consistently growing throughout last year hitting at 19.06 per cent in November. The credit growth was 18.63 per cent in October, 19.40 per cent in September amid a depressed deposit growth in banking system.Nurul Amin said banks might find it tough to mobilise additional deposits as a result of recent loan scams and higher return on saving certificates. The prevailing situation has created an uneven competition among the banks for deposit collection that sends a fresh wave of volatility in the money market.Â "Loan growth has been steady since the start of 2017, as most of the banks went for aggressive banking. Even many banks expanded loans by this time going beyond their AD ratio ignoring BB's warning. This has led them to liquidity crisis," said former BB Deputy Governor Dr Khandoker Ibrahim Khaled. According to a central bank directive, commercial banks must maintain an AD ratio of 85 per cent, while it is 90 per cent for Islamic Banks. It came up with the move to cap banks' investment limit. Ibrahim Khaled asked the central bank to take stringent regulatory measures against the banks, which crossed their lending limits.Â When asked, he said, "Banks' shift towards higher interest rate reflects their desire to mobilise more deposits given the emerging liquidity crisis as compared with the previous position. Â "The interest hike would make the money market volatile afresh. It would also fuel inflation sending an adverse impact on the overall economy," he added.